Hospitality Industry Warned: Prepare for New Tips and Gratuities Law or Face Tribunals

Changes Take Effect on 1 October 2024

Businesses in the hospitality industry are being urged to ensure they are ready for new legislation regarding tips and service charges that will come into effect on 1st October 2024. The Employment (Allocation of Tips) Act 2023 will make it illegal for employers to withhold tips and service charges from their staff, impacting more than two million workers across the UK.

What the New Law Means

Under the new law, employers must distribute 100% of the tips generated in their establishments to employees in a fair and transparent manner. To comply with the legislation, businesses are required to:

• Allocate tips fairly and transparently.
• Have a written policy on how tips are distributed to staff.
• Ensure all tips are passed on to workers by the end of the month following the month they were received.

The changes come after a government consultation revealed that an estimated £200 million worth of tips was being withheld by companies.

Risks for Employers

Jez Howson, Employment Tax Director at accountancy firm Azets, warns that there is no grace period for businesses to adapt to the new rules. Employers who fail to comply could face employment tribunals. If a worker feels that the allocation of tips is unfair or discriminatory, they can raise a claim, which, if successful, could result in compensation of up to £5,000.

“The risk sits solely with the employer, and this cannot be transferred to a third party such as a troncmaster,” Jez said. A troncmaster is someone appointed by a business to manage the distribution of tips, and although they can help ensure fairness, the employer remains accountable for compliance with the new law.

Understanding Tronc Schemes

A tronc scheme, derived from the French ‘tronc des pauvres’ meaning collecting boxes for the poor, is a way for businesses to fairly distribute tips and service charges. When an independent troncmaster is appointed, tips are only subject to PAYE (Pay As You Earn) tax, and not National Insurance Contributions (NICs). This can lead to significant savings for both employers and employees.

However, appointing a troncmaster does not relieve employers of their responsibility to ensure that the distribution method is fair and reasonable.

Preparing for the Change

Azets is advising businesses to seek professional help, host employee consultations, and implement a tronc scheme if necessary. The firm is hosting a webinar on Monday 16th September to discuss the legislation, with input from UK law firm Trethowans.

The webinar will cover processes to support compliance, legal considerations, and the tax treatment of tips and gratuities, followed by a Q&A session.

About Azets

Azets is an international advisory, outsourcing, and compliance group. In the UK, it is a top ten accountancy firm with over 90 offices nationwide and more than 3,800 employees. The firm provides advice and personalised services across accounting, tax, audit, advisory, people, and technology.

For more information, visit Azets’ website.

This new legislation marks a significant shift in how the hospitality industry handles tips and gratuities. Businesses must act now to ensure they are compliant, or they could face costly penalties.

Photo: Jez Howson, Employment Tax Director at UK top ten accountancy firm Azets, has warned the hospitality industry that new legislation being introduced on October 1 will make it unlawful for employers to withhold tips and service charges from staff – and there is no transition period. Businesses must comply with the Employment (Allocation of Tips) Act 2023 from 1st October.